Management Accounting

Transcription

1 Management Accounting 2 nd Year Examination May 2016 Exam Paper, Solutions & Examiner s Comments Page 1 of 24

2 NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations. Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits. This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved. This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, 2016 Page 2 of 24

3 Accounting Technicians Ireland 2 nd Year Examination: Summer 2016 Paper: MANAGEMENT ACCOUNTING Monday 16 May p.m. to 5.30 p.m. INSTRUCTIONS TO CANDIDATES In this examination paper the symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions in Section A and ANY TWO of the three questions from Section B. If more than the required number of questions is answered, then only the requisite number, in the order filed, will be corrected. Candidates should allocate their time carefully. All figures should be labelled, as appropriate, e.g. s, units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 2 overleaf. Note: Examinees are permitted to use terminology of either International Accounting Standards (I.A.S s) or Financial Reporting Standards (F.R.S s) where appropriate (e.g. Receivables/Debtors) when preparing management accounting statements. Page 3 of 24

4 QUESTION 1 (Compulsory) SECTION A Answer All Questions a) Foxclover plc. has employed a number of trainee accountants as part of its graduate programme. They are having difficulty understanding certain types of costs such as those listed below. The financial controller has asked you to briefly explain, with the aid of an example, each of the following cost classifications: (i) Variable cost; (ii) Fixed cost; (iii) Mixed cost (Semi variable / semi fixed cost). (6 Marks) b) The following information has been supplied for Foxclover plc. for the forthcoming financial year. Activity Production (units) 80, ,000 Sales (units) 76, ,000 Costs Direct material 208, ,000 Direct labour 296, ,000 Factory overhead 410, ,000 Selling and distribution 118, ,000 Administration 130, ,000 Required: Prepare a table summarising the variable cost per unit and total fixed cost for each of the five cost headings above. (10 Marks) c) Using your answer to part (b) calculate the total estimated cost for an activity level of production of 75,000 units and sales of 68,000 units. Please apportion the costs between their variable and fixed elements. (4 Marks) Total: 20 Marks Page 4 of 24

5 QUESTION 2 (Compulsory) Heuston plc. is involved in the design and manufacture of train engines. The company has just received an enquiry about the possibility of supplying 30 engines to a privatised transport company Colbert plc. The finance director of Colbert plc. has informed Heuston plc. that they have just received quotes from other manufacturers of train engines and that the most reasonable quote was 145,000 per engine. The management accountant of Heuston plc. has provided you with the following details relating to the costs involved in the construction of the train engines: 1. Each engine will require 12 litres of oil. The company has 300 litres of oil in stock and if the oil is not used it will be disposed of immediately. The costs of disposal is 1,850. The original purchase price of the oil in stock was 340 per litre. The replacement cost of a litre of oil is Each engine will also require 15 sheets of alloy steel. The purchase price of a sheet of steel is 3,800 for all purchases up to and including 300 sheets. The supplier has agreed to offer a discount of 10% on the purchase price on all purchases over 300 sheets. 3. Additionally, each engine will require 1 slab of cast iron and this type of iron is used regularly by Heuston plc. The company holds 22 of these slabs in the warehouse at present. These slabs of cast iron cost 3,150 each one month ago and because cast iron is in limited supply the replacement cost is now 3,415 per slab. 4. The construction of the engines will require a combination of skilled and unskilled labour. Each engine will require 35 skilled labour hours and 10 unskilled labour hours. The skilled labourers are paid 180 per hour and the unskilled labourers are paid 55% of the skilled hourly rate. If this contract does not go ahead there will be 300 skilled idle hours and the company is reluctant to make redundancies due to continued loyalty towards its staff. The unskilled labour will have to be hired in for the contract. 5. The project will require a project manager to oversee the work. Heuston plc. currently employs a manager with the necessary experience who will be transferred to the proposed project should it go ahead. This manager currently earns 78,000 per annum. Due to the size of this project Heuston plc. has agreed to pay him an additional 5% of his current salary. The project manager will then be replaced by a less experienced manager who will be paid an annual salary of 65, Variable overheads are absorbed at a rate of 102 per skilled labour hour. 7. Fixed overheads will increase from their current level of 1,360,000 to 2,175,000 if the project to produce the engines is undertaken. 8. In order to assess the practicalities of taking on this project Heuston plc. employed a company to research the availability of materials and experienced labour. This research cost 11,000 and 4,000 is still outstanding. If Heuston takes on the project future research into safety issues will be required at a cost of 5,500. Required: a) Provide a brief explanation for each of the following terms: (i) Sunk cost; (ii) Committed cost; (iii) Incremental cost. (6 Marks) Page 5 of 24

6 b) Using relevant costing principles, determine whether or not Heuston plc. should undertake the contract. Your answer must include an explanation for the inclusion or exclusion of each of the points 1 to 8 above. (10 Marks) c) List four qualitative factors that should be considered before a final decision is made. (4 Marks) Total 20 Marks Page 6 of 24

7 QUESTION 3 (Compulsory) Kensington plc. commenced production of a new product the Terex during the year. Management is concerned as to the performance of this new product and has provided you with the following information: Standard data for the first 6 months per unit Sales price Materials 2 kg Direct labour 1.5 hours Variable overhead 1.5 hours Fixed overhead 1.5 hours Total costs Budgeted production 12,000 units Actual results for the first 6 months Production and sales 11,200 units Sales price per unit 120 Materials (20 per kg) 483,000 Direct labour (19 per hr) 332,500 Variable overhead 175,000 Fixed overhead 112,000 Required: a) Calculate the following variances: (i) Sales price; (ii) Sales volume; (iii) Material price; (iv) Material usage; (v) Labour rate; (vi) Labour efficiency; (vii) Fixed overhead expenditure; (viii) Fixed overhead volume. (16 Marks) b) Explain the reasons for the occurrence of a fixed overhead expenditure and fixed overhead volume variance. (4 Marks) Total: 20 Marks Page 7 of 24

8 QUESTION 4 SECTION B Answer any two of the following questions Due to an increasing workload your company has employed a trainee accountant to assist with routine transactions. The trainee is unsure of the differences between the following management accounting terms. 1. Direct costs and indirect costs 2. Product costs and period costs 3. Mixed costs and stepped costs 4. Normal loss and abnormal loss 5. Cost pool and cost driver The financial controller has asked you to provide written explanations of the differences between the terms, as she feels that the above terms are fundamental to an understanding of management accounting. Required: Prepare brief notes which explain the difference between the management accounting terms in any four of the five groups above. (Each part carries equal marks). Total: 20 Marks Page 8 of 24

9 QUESTION 5 The following information relates to Clayton plc. a manufacturing company that has two manufacturing departments and two service departments: Manufacturing Dept. 1 Manufacturing Dept. 2 Service Dept. 1 Service Dept. 2 Total overheads 48,600 43,800 18,600 19, ,275 General overheads Indirect labour 48,000 Heat & light 72,000 Factory repairs & maintenance 51,200 Staff canteen costs 8,000 Machine depreciation 21,000 Rent of building 24, ,200 Total overheads 354,475 The following additional information was extracted from the company s management accounting records. Manufacturing Dept. 1 Manufacturing Dept. 2 Service Dept. 1 Service Dept. 2 Floor space sq. m 5,000 8,000 2,000 1,000 Direct labour hours 60,000 30, Indirect labour hours 25,000 15, Direct labour rate per hour Number of staff Machine hours 5,000 30, Machine value 60, ,000 40,000 - Re-apportioned Service dept. overheads as follows: Service Dept. 1 overheads 40% 60% Service Dept. 2 overheads 70% 30% Data on two jobs being undertaken by the company is as follows: BEW 110 INT 120 Direct materials cost Machine hours Direct labour hours - Manufacturing Dept Manufacturing Dept Required: a) Prepare a statement showing the overhead cost for each manufacturing department (include the basis of apportionment, where appropriate). (10 Marks) b) Calculate a suitable overhead absorption rate for each manufacturing department, using a basis that you deem suitable. (4 Marks) Page 9 of 24

10 c) Show the total cost of jobs BEW 110 and INT 120. (6 Marks) Total: 20 Marks Page 10 of 24

11 QUESTION 6 Sweeney Ltd. manufactures street lamps for the City Council. The following is the budgeted Income Statement for the business for December 2015: '000 '000 Sales Revenue 21,200 Direct material 10,000 Direct labour 3,920 Production overhead 1,720 Selling overhead 2,120 17,760 Profit 3,440 The following information is also supplied: 1. The monthly budgeted production and sales is 5,000 units. 2. Fixed and variable costs can be broken down as follows: Variable % Fixed % Direct materials Labour Production overhead Selling overhead Required: a) Calculate the following: (i) Total contribution for the year; (ii) Contribution per unit; (iii) Contribution / sales ratio; (iv) Breakeven sales volume; (v) Margin of safety %; (vi) Sales volume required to achieve a profit of 2,960,000. Note: Each section carries equal marks. (12 Marks) b) Prepare a clearly labelled breakeven chart, showing the breakeven point, margin of safety and expected profit. (4 Marks) c) CVP analysis is based on a number of underlying assumptions and limitations that affect its validity. List four limitations of CVP analysis. (4 Marks) Total: 20 Marks Page 11 of 24

12 2 nd Year Examination: May 2016 Management Accounting Suggested Solutions and Examiner s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits. Statistical Analysis By Question Question No Average Mark (%) 71% 59% 43% 68% 63% 55% Nos. Attempting Statistical Analysis Overall Pass Rate 69.5% Average Mark 58.5% Range of Marks Nos. of Students and over 248 Total No. Sitting Exam 766 Total Absent 109 Total Approved Absent 48 Total No. Applied for Exam 923 Page 12 of 24

13 General Comments: GENERAL COMMENTS ON THE PAPER AS A WHOLE: This paper was divided into two sections A and B each consisting of three questions. All three questions in section A were compulsory and candidates had a choice of two from three questions from section B. All of the questions carried 20 marks each. Five out of the six questions were mainly computational with some narrative elements whilst question 4 was all narrative. A very small minority were not aware of the requirements of the paper as they answered two questions from section A and three from section B. Questions 1,2,3,5 and 6 examined five areas of the syllabus in detail whilst question 4 required an explanation of management accounting terms relating to another four areas of the syllabus. All of the areas examined are key elements of the syllabus and given the depth of their coverage in the study text, past exam papers and sample papers they should not have posed any difficulty. Overall, I am very happy with the performance of candidates sitting this paper. There was less evidence of rote learning and it was obvious that most candidates were well prepared for the questions which were examined. The majority of scripts were very well presented. In some cases there was no evidence of workings. Candidates presented a final figure rather than showing the workings which lead to this figure. If this final figure is not correct then valuable marks are lost for workings. Furthermore, candidates should be aware that marks are awarded if the principle is correct even if the incorrect figures are used. In order to answer some parts of a question the solution to a previous part is required. If the figures carried forward are incorrect marks will not be lost if the principle is correct. The candidate will not be penalised twice, so it is important that all parts of a question are attempted. Examiner Comments on Question One This question was compulsory and tested the candidate s knowledge of variable, fixed and mixed costs. Part (a) of this question required candidates to provide an explanation together with an example for variable, fixed and mixed costs. The standard of answers was very high for this part of the question and most candidates scored very highly. Others lost out on very easy marks by not providing an example as required but those candidates were in the minority. Part (b) of the question required candidates to calculate the variable cost per unit and the total fixed cost under five cost headings. This required acknowledge of the high-low method and candidates demonstrated a comprehensive understanding of this method. Part (c) of the question required candidates to calculate the total cost for a given level of production and sales. This part of the question was answered very well by the majority of the candidates. In the minority of cases this part of the question was either not attempted or those that did attempt it struggled with it. SOLUTION 1 a) (i) A Variable cost is a cost that varies as the level of activity changes. Material cost is an example of a variable cost as the more of a product that is produced the more material that is be required. (ii) A Fixed cost is a cost that remains the same irrespective of the level of activity. The cost of renting a building would be classified as a fixed cost. The rent would be paid periodically and would not vary with the level of activity. Page 13 of 24

14 (iii) A Mixed cost is a cost that is partly fixed and partly variable. The remuneration package of a sales representative would be an example of a mixed cost. The basic salary of the sales representative is the fixed element and any sales commission paid would depend on the volume of sales achieved, hence, the variable element. b) Workings Total Marks 2 marks for each part. 1 mark for explanation and 1 mark for example. Cost per unit Variable Fixed Working Total Marks Direct material Direct labour Factory overhead , Selling & distribution , Administration nil 130, , ,000 / 80, per unit ,000 / 80, per unit 3. VC 100,000 / 50,000 = 2 per unit FC 410,000 (80,000 x 2) = 250, VC 50,000 / 40,000 = 1.25 per unit FC 118,000 (76,000 x 1.25) = 23, All fixed c) Variable costs Direct material Direct labour Total Marks 75,000 x ,000 x , ,500 Factory overhead 75,000 x 2 150,000 Selling & distribution 68,000 x ,000 Total variable costs 707,500 Fixed costs Factory overhead 250,000 Selling & distribution 23,000 Administration 130, ,000 Total costs 1,110,500 Page 14 of 24

15 Examiner Comments on Question Two This question was compulsory and tested the candidate s knowledge of decision making. In order to perform well in this question candidates required a strong grasp of relevant costing principles for decision making. Part (a) required an explanation of relevant costing concepts and this didn t create any difficulty. Part (b) required candidates to recommend if engines should be produced internally or purchased externally. I notice a big improvement in the quality of answers since last year s paper, with candidates demonstrating a high competence in applying the relevant costing rules. Part (c) requested four qualitative factors that the company should consider before making a final decision. This part was exceptionally well answered with most candidates gaining full marks. SOLUTION 2 a) (i) A sunk cost is a past cost which is not relevant to a decision. (ii) A committed cost is a past cost that has not yet been paid but which the business is committed to paying. (iii) An incremental cost is an additional cost incurred as a result of choosing a particular course of action. b) Total Marks 2 marks for each part Total Marks Materials: Oil 1 19,150 1 Steel 2 1,653,000 1 Cast iron 3 102,450 1 Labour: Skilled labour 4 135,000 1 Unskilled labour 4 29,700 1 Project manager - existing 5 3, new 65,000 1 Variable overheads 6 107,100 Fixed production overheads 7 815,000 Research and development: 8 Sunk (not relevant) Committed (not relevant) Future 5,500 2,935,800 Maximum revenue 9 4,350,000 Page 15 of 24

16 Heuston plc. should undertake the contract as they would achieve a minimum profit of 1,410,500 based on more reasonable quotes from competitors. Notes: 1. The project requires (30 x 12 litres) = 360 litres of oil. There are 300 litres of oil in stock. If the oil is not used by the company then it will be disposed of at a cost of 1,850. As this stock has no other alternative use its relevant cost is 1,850. Also 60 litres of oil will need to be purchased at a cost of 350 per litre ( 21,000). Total relevant cost of oil for the decision 19, The engines requires (30 x15 sheets) = 450 sheets of steel. Cost of 300 sheets is 300 x 3,800 = 1,140,000. Cost of 150 sheets is 150 x 3,420 = 513,000. Total cost is 1,653, The cast iron is used regularly by the company so if it is used on the engines it will have to be replaced immediately. The relevant cost is 30 x 3,415 = 102, Skilled hours required are (30 x 35 hours) = 1,050 hours. Because there are 300 hours idle time the relevant cost is 750 x 180 = 135,000. Unskilled hours required are (30 x 10 hours) = 300 hours so cost is 300 x 99 = 29, The relevant cost of the existing project manager is 3,900 as he will receive an additional payment over what he currently earns (78,000 x 5%). A replacement project manager will be employed specifically as a result of this project at 65,000 per annum. 6. Variable overheads are relevant costs as they will only be incurred if the job is undertaken. The cost is 30 x 35 skilled hours x 102 = 107, Fixed overheads are relevant costs as they are incremental. The relevant cost is the increase in the fixed overheads which is 815, The cost of research and development is not a relevant cost. The cost has been incurred irrespective of whether the construction takes place. The amount paid of 7,000 is known as a sunk cost and the unpaid amount of 4,000 as a committed cost. 9. By undertaking the contract the company would receive a maximum of (30 engines x 145,000) = 4,350,000. c) Qualitative characteristics 1. Reliability of supplier 2. Quality of the product 3. Effect on employee morale 4. Environmental issues (Other reasonable answers will be accepted) Total Marks 1 mark each Page 16 of 24

17 Examiner Comments on Question Three This question was compulsory and tested the candidate s knowledge of standard costing and variance analysis. Part (a) of the question required candidates to calculate variances for certain cost elements. This area of the syllabus seems to be still creating problems. Unlike other areas of the syllabus, the standard of answers has not improved over the past few years. Part (b) of the question required candidates to outline one possible reason for each of the fixed overhead volume and expenditure variances. This part of the question was not well answered even by candidates that answered part (a) well. SOLUTION 3 a) i. Sales price variance Total Marks 11,200 should have sold for (11,200 x 110) 1,232, ,200 actually sold for (11,200 x 120) 1,344,000 1 Variance 112,000F ii. Sales volume variance Budgeted sales units 12,000 1 Actual sales units 11, A x Standard profit per unit 10 Variance 8,000A iii. Material price variance Total Marks 24,150 kg should have cost (24,150 x 23) 555, ,150 kg actually cost 483,000 1 Variance 72,450F iv. Material usage variance 11,200 units should have used (11,200 x 2kg) 22,400 kg 1 11,200 units actually used 24,150 kg 1 1,750kgA x Standard cost per kg of material 23 Variance 40,250A Page 17 of 24

18 v. Labour rate variance Total Marks 17,500 hours should have cost (17,500 x 315, ) 17,500 hours actually cost 332,500 1 Variance 17,500A vi. Labour efficiency variance 11,200 units should have taken (11,200 x ,800 hrs 1 hrs) 11,200 units did take 17,500 hrs hrs A x standard direct labour cost per hour 18 12,600A vii. Fixed overhead expenditure variance Total Marks Budgeted Fixed Overhead 144,000 1 Actual Fixed Overhead 112,000 1 Variance 32,000 F viii. Fixed overhead volume variance Total Marks Budgeted output 12,000 1 Actual output 11, A x Standard overhead cost per unit 12 Variance 9,600A Alternative method for answering part a) (i) ( ) x 11, ,000 fav. (ii) (11,200 12,000) x 10 8,000 adv. (iii) 483,000 (24,150 x 23) 72,450 fav. (iv) (24,150 22,400) x 23 40,250 adv. (v) 332,500 (17,500 x 18) 17,500 adv. (vi) (17,500-16,800) x 18 12,600 adv. (vii) 144, ,000 32,000 fav. (viii) (11,200-12,000) x 12 9,600 adv. b. Reasons for a fixed overhead expenditure variance 1. The costs of individual overhead costs may have changed 2. There may be an incorrect split between fixed costs and variable costs 3. Reasons for a fixed overhead volume variance 1. The costs of individual overhead costs may have changed 2. There may be an incorrect split between fixed costs and variable costs 3. The actual production volume differs from budgeted production volume and this will affect overhead absorption. Page 18 of 24

19 Total Marks 2 marks for each part Examiner Comments on Question Four This question was optional and tested the candidate s knowledge of four out of five management accounting terms. For those candidates that did opt for this question it was generally well answered with candidates demonstrating a reasonable knowledge of the costing terms examined. SOLUTION 4 Direct and indirect costs Direct costs are costs that can be traced in full to a product or service. It can only be classified as a direct cost if the exact amount that relates to a product or service is known. If costs are shared between products or services then they cannot be classified as direct costs. Indirect costs are costs that cannot be traced in full to a product or service. Indirect costs must be shared between different products or services. Indirect manufacturing costs are also known as production overheads. Total Marks 5 marks Product and period costs Product costs are costs that are related to the manufacturing process and consist of both direct manufacturing costs and indirect manufacturing costs. Period costs are costs that are associated with a reporting period, rather than related to the manufacturing process. All non-manufacturing costs are treated as period costs. Total Marks 5 marks Mixed and stepped costs A mixed cost is a cost that contains a variable element and a fixed element. A stepped cost is a cost that is fixed within a given range but once that level of activity is reached the cost increases and becomes fixed again within a new range of activity. Normal and abnormal losses Total Marks 5 marks A normal loss is the loss that is expected under normal production conditions. Page 19 of 24

20 An abnormal loss is the extra loss that is incurred over the normal loss level. Total Marks 5 marks Cost pool and cost driver A cost pool is a grouping of individual costs, typically by department or service center. Cost allocations are then made from a cost pool. For example, the cost of the maintenance department is accumulated in a cost pool and then allocated to those departments using its services. A cost driver triggers a change in the cost of an activity. The concept is most commonly used to assign overhead costs to the number of produced units. It can also be used in activity-based costing analysis to determine the causes of overhead, which can be used to minimize overhead costs. Direct labor hours worked Number of customer contacts Number of engineering change orders issued Number of machine hours used Number of product returns from customers Total Marks 5 marks Examiner Comments on Question Five This question was optional and tested the candidate s knowledge of the allocation and absorption of overheads. This is the first time that I examined this type of question. This question was very well answered with many candidates demonstrating a high competence in this area and gaining almost full marks. Part (a) required candidates to firstly allocate overheads between cost centres and service cost centres and then reallocate the service cost centre overheads to the cost centres. This was exceptionally well answered. Part (b) of the question required candidates to use the information from part (a) and calculate an overhead absorption rate for each of the cost centres. Again this part was very well answered. Part (c) of the question required candidates to work out the total cost for two jobs. In general this part of the questions was not answered well. Candidates had difficulty in applying the overhead rates calculate in part (b) to a particular job. Page 20 of 24

21 Basis of Apportionment Dept. 1 Dept. 2 Service 1 Service 2 Total Total Marks 48,600 43,800 18,600 19, ,275 1 Overheads Apportioned Overheads Indirect labour Indirect labour 30,000 18,000 48,000 1 hours Heat & light Floor area 22,500 36,000 9,000 4,500 72,000 1 Factory repairs & Floor area 16,000 25,600 6,400 3,200 51,200 1 maintenance Canteen subsidy Number of staff 6,000 2,000 8,000 1 Machine depreciation Machine value 3,600 15,000 2,400 21,000 1 Rent of premises Floor Area 7,500 12,000 3,000 1,500 24,000 1 Apportioned overheads 85, ,600 20,800 9, ,200 1 Total overheads 134, ,400 39,400 28, ,475 Re-Apportioned Overheads Re-Apportion Service 1 40% / 60% 15,760 23,640 (39,400) 0 1 Re-Apportion Service 2 70% / 30% 19,932 8,543 (28,475) 0 1 Total Overheads 169, , ,475 SOLUTION 5 a) Overhead cost for each department b) Overhead Absorption Rate for each Department Manufacturing Department 1 Overhead absorption rate based on labour hours as this department is labour intensive 169,892 60,000 direct labour hours = 2.83 per direct labour hour Manufacturing Department 2 Overhead absorption rate based on machine hours as this department is machine intensive 184,583 30,000 machine hours = 6.15 per machine hour Total Marks 2 marks for each overhead calculations Page 21 of 24

22 c) Total Marks Direct Materials Direct Labour - Dept. 1 - Dept hours x 18 per hour 10 hours x 10 per hour 1, Overheads - Dept. 1 - Dept. 2 Total cost 80 DL hours x 2.83 per DL hour 12 MC hours x 6.15 per Mach hour , INT 120 Direct Materials Direct Labour - Dept. 1 - Dept hours x 18 per hour 15 hours x 10 per hour Overheads - Dept. 1 - Dept DL hours x 2.83 per DL hour 40 MC hours x 6.15 per Mach hour Total Cost 2, Examiner Comments on Question Six This question was optional and tested the candidate s knowledge of cost volume profit analysis. Part (a) required calculations of total contribution, contribution per unit, contribution to sales ratio, breakeven point, margin of safety and activity required to produce a certain profit. The question was generally well answered with most candidates demonstrating a full understanding of the concepts underlying CVP analysis. Part (b) required candidates construct a graph showing breakeven point, margin of safety and expected profit. This part of the question was generally well answered. Part (c) required candidates to list the limitations of CVP analysis. The vast majority of candidates were not aware of these limitations (including candidates who scored very highly in the previous parts). Page 22 of 24

23 SOLUTION 6 a) (i) Total Marks Sales Revenue 21,200 Less Variable Cost 13,984 Contribution 7,216 2 (ii) Total Marks Selling 4.24 (21,200 5,000) price Variable Cost 2.80 (13,984 5,000) CPU or 7,216/5,000 units = 1.44 (iii) C.P.U. / SP x 100 Total Marks 1.44 / 4.24 x 100 = 34% 2 (iv) (v) Fixed Cost 3,776 = 2,622 units Total Marks CPU Expected Sales (units) 5,000 Total Marks BEP Sales (units) 2,622 Margin of Safety (units) 2,378 Margin of Safety % 47.56% 2 (vi) Fixed Costs + Target Profit C.P.U. (3, ,960) = 4,677 units 1.44 Total Marks 2 Page 23 of 24

24 Working 1 Variable Fixed Direct Material 10,000 Direct Labour 1,176 2,744 Production Overhead 688 1,032 Selling Overhead 2,120 13,984 3,776 Total Marks c) Limitations of CVP analysis 1. Assumes the selling price is constant. Not necessarily so as bulk discounts may be obtained. 2. The variable cost per unit is constant and this ignores the impact of economies of scale. 3. Some costs may be mixed and this is ignored in the model. 4. CVP analysis only applies to a short-term horizon Page 24 of 24